Thursday, January 8, 2009

Bad Debt the Problem? Let's Solve it By Making More

George F. Will has been the best main stream critic of the bailouts. (Before this fall, I wasn't even sure he was still writing.) In his syndicated column he points out the sleaze and the wishful thinking of the recent GMAC bailout. (Here)

Right after GMAC became eligible for TARP money, GM reduced to zero the interest rate - for up to 60 months - on certain models. This, of course, penalizes GM competitors, including Toyota, Honda and other "transplants" whose cars are made in America by Americans for Americans, and Ford, which doesn't have the freedom of maneuver conferred by TARP money because Ford isn't taking any.

This redundant evidence that no good deed goes unpunished might be a reason for Ford to take some. Then it could join GM in using taxpayers' money to produce more troubled assets. The New York Times reports that GMAC has begun making loans to borrowers with credit scores as low as 621, a significant relaxation of the 700 minimum score the company adopted just three months ago as it struggled to survive. America's median credit score is 723. GMAC's lowered standards will increase the number of people eligible for its loans by an estimated 50 million.

What should one call loans made to applicants who, three months ago, were thought to be trying to buy more expensive cars than they could afford? How about "subprime loans"? Thus does the economy, which is suffering a fierce hangover after going on a bender of reckless borrowing, try a familiar remedy - the hair of the dog.

This is getting worse and worse. I reminds me of that Johnny Cash song about the flood waters:

How high's the water, mama? Three feet high and risin'How high's the water, papa? Three feet high and risin'Well, the hives are gone,I've lost my beesThe chickens are sleepin'In the willow treesCow's in water up past her knees, Three feet high and risin'

3 comments:

In any aspect of life if there is a problem, you correct the problem, by changing your behaviour. Increasing the amount of the same bad behaviour to correct a problem, would be considered insane by most people. That is what recessions do, they correct economic imbalances. They clean out the bad behaviour, and get things back on track. Recessions are a natural process, and can not be avoided. The US government wants to increase the amount of cheap credit available, to fix a recession caused by too much cheap credit. Does anyone out there think that this will work?